Australia will bounce back

Productivity Commission chairman
Gary Banks
has acknowledged that some of Australia’s poor performance in productivity may be the result of temporary factors that will eventually rebound.

The commission chairman told the Australian Business Economists conference in Sydney yesterday the nation must boost productivity levels from internationally low levels through reform to ensure rising living standards.

The Australian economy’s productivity rate, or the efficiency at which it uses labour and capital resources, has been lagging inter­national counterparts.

Labour productivity, the most widely understood measure of ­productivity, fell 0.5 per cent in the September quarter, according to the Australian Bureau of Statistics national accounts data released last week. Over the past five years, labour productivity has averaged an annual pace of 1.2 per cent, lower than the 2.3 per cent in the previous five years, and the rates above 4 per cent of the late 1990s.

It is defined as output per unit of labour, or the gross domestic product for each hour of labour in the market sector in September.

Mr Banks said most recent data showed multi-factor productivity – the Productivity Commission’s preferred productivity measure – recorded “only slight growth" in 2009-10 after falling 2.4 per cent in 2008-09. Multifactor productivity growth has generally been weak since the early 2000s.

Although it is difficult to measure, economists prefer MFP because it is a more pure gauge of productivity, capturing the growth in the GDP owed to factors such as technological innovations and achieving greater economies of scale in production.

Labour productivity is less appealing as it could improve simply be­cause the economy is investing in more capital, not because labour becomes more productive.

Related Quotes

Company Profile

Economists estimate MFP using sophisticated models that separate how much economic growth owes to productivity growth (increased outputs from the same quantity of inputs) and how much from increased inputs (increased outputs from more capital goods or additional working hours).

“The co-existence of historically low growth in multi-factor productivity with historically high growth in income, capital investment and jobs over recent cycles is likely to have been more than coincidental," Mr Banks said.

“Much of the recent pronounced decline in multi-factor productivity can be traced to developments in a few specific markets – reflecting the mining boom and drought – that cannot be blamed on lack of reform or poor policy. It is therefore likely to be self-correcting in time."

Policymakers look to productivity as a key source of boosting long-run economic growth. In the simplest sense, GDP growth can be derived only from three sources: population growth, rising workforce participation, and greater efficiency, or productivity. In its Intergenerational Report, the Australian Treasury said that of the three, productivity accounted for the lion’s share of rising real capital incomes.